3I0-012 ACI Dealing Certificate Questions and Answers

Forward points

Full forward exchange rate

Depends on whether is interbank or to a customer

Depends on the currency pair and sometimes the term

unchanged

118/116

109/107

106/104

When the bank’s income is secured on the trade.

If the unsecured credit is taken into account.

It the bank knows the customer very well.

When there are written procedures and policies for such transactions.

Will examine the complaint.

May consult with the local ACI.

Will bring the matter to the attention of the local regulator.

None of the above.

5.8342%

5.8561%

5.8425%

5.75%

It is good practice for compliance, legal or credit functions to identity counterparties before the execution of a deal.

Management should have in place a clearwritten policy and procedures governing such transactions.

Management needs to be aware of the risks involved, particularly with respect to credit exposure and money laundering.

All of the above.

Ban them from the dealing room or back office.

State whether they are allowed in the dealing room and back office, and can be used.

Ban their use in the dealing room or back office.

Restrict their use to senior management and authorised out-of-hours trading and sales staff.

1.2232

1.2233

1.2234

1.2267

The customer understands the structure of the transaction.

The customer has made its own assessment and independent decision to enter into the transaction and is doing so at its own risk and for its own account.

No fiduciary or advisory relationship exists between the parties, and all the information is has received is not to be construed as investment advice or a recommendation to transact.

All of the above.

The sensitivily of the option value to changes in interest rates

The sensitivity of the option value to changes in volatility

The sensitivity of the option value to changes in the time to expiry

The sensitivity of the option value to changes in the price of the underlying

Buy USD spot, and buy and sell a 3-month EUR/USD FX swap

Sell EUR/USD in the spot market, borrow EUR for 3 months and lend USD for 3 months

Sell a 3-month EUR/USD outright forward

Any of the above

Always decline gifts.

Give the gift to charity.

Keepthe gift.

Report the gift to management.

You will have to pay USD 612.50

You will receive USD 612.50

You will have to pay USD 3,675.00

You will receive USD 3,675.00

4,816,500.00

1,869,158.88

1,868,57677

4,815,000.00

-EUR 52,161.00

-t-EUR 47,839.00

-EUR 3,827.67

Nil

By agreement between the two counterparties, the trade must be cancelled as soon as practically possible since a rate amendment is prohibited.

By agreement between the two counterparts, the trade should, as soon as practically possible, either be cancelled or have its rate amended to an appropriate market rate.

The off-market rate should be adjusted as soon as possible to the appropriate current market rate and a new authenticated SWIFT confirmation sent immediately to the counterparty.

Nothing need be done, since once a trade is agreed to by the front office it is a binding agreement for both counterparties.

The buyer

The seller

Neither

Both

The price of the underlying instrument at the time of the transaction

The price at which the transaction on the underlying instrument will be carried out if and when the option is exercised

The price the buyer of the option pays to the seller when entering into the options contract

The price at which the two counterparties can close-out their position

You pay CAD 20,000.00

You receive CAD 20,000.00

You pay CAD 19,952.61

You receive CAD 19,952.61

27th August

30th August

31st August

1 September

A bank purchases credit protection on highly-rated tranches of US mortgage-backed securities from a US mortgage bank

A bank sells protection on the iTraxx main index at a level of 25 bps and shortly afterwards the index crosses the 200 bps level

A bank sells EUR put I USD call ATM options with an expiry date of 6 months and afterwards volatility moves up to substantially higher levels

A bank enters into a receiver’s swap while interest rates are increasing

at least 995/1000 pure gold; weight between 350 and 430 fine ounces

minimum 999.9/1000 pure gold; weight between 350 and 430 fine ounces

at least 995/1000 pure gold; weight of 400 fine ounces

minimum 995/1000 pure gold; weight of 400 fine ounces

-30

+29

-29

+30

The sensitivity of the option value to changes in interest rates

The sensitivity of the option value to changes in implied volatility

The sensitivity of the option value to changes in the time to expiry

The sensitivity of the option value to changes in the price of the underlying

A 3-month deposit of USD 10,000,000.00 offered by a US bank in New York

A 3-month deposit of USD 10,000,000.00 offered by the US branch of a UK bank in New York

A 3-month deposit of USD 10,000,000.00 offered by a US bank in London

A 3-month deposit of GBP 10,000,000.00 offered by the UK branch of a US bank in London

EUR 11,035,336.41

EUR 11,035,351.74

EUR 11,039,752.32

EUR 11,039,767.65

prices increase during a systemic crisis

return on investment is relatively high

absence of active market makers

wide bid/offer spreads

at least two months

one year

up to one month

at least three months

Sell interest rate caps

Sell futures

Sell FRAs

Buy futures

XAU

XAG

XPT

XPD

6.5825

6.5820

6.5815

6.5830

A purchase of a cap and a sale of a floor

A purchase of a floor and a sale of a cap

A purchase of a cap and a purchase of a floor

A sale of a cap and a sale of a floor

Today

Tomorrow

After you make an irrevocable payment

On the spot value date

aFXswap

an in/out swap

a currency swap

a quanto swap

documented and reported to the local regulator

communicated to local staff by a confidential internal circular

investigated immediately according to a properly documented procedure

reported to the ACI’s Committee for Professionalism to investigate and advise accordingly

In their function as intermediaries, banks must necessarily accept some degree of interest rate risk.

Banks incur interest rate risk to increase income

Banks prefer c red it risk to market risk.

If banks failed to take on interest rate risk they would not be able to meet the needs of their deposit and loan customers.

It checks the eligibility and sufficiency of collateral

It can impose an initial margin on behalf of the buyer and manages margin calls

It manages substitution of collateral on behalf of the seller

It participates in the risk of transactions if one of the parties defaults

Margin maintenance

Re-pricing

Margin maintenance or re-pricing, but usually margin maintenance

Margin maintenance or re-pricing, but usually re-pricing

A prerequisite for hedge accounting is that a hedging instrument is designated as an offset to changes in the fair value or cash flows of a hedged item.

Hedge accounting enables gains and losses on a hedging instrument to be recognised in the income statement in the same period as offsetting losses and gains on the hedged item.

If one of the criteria for hedge accounting is no longer met, there is an option to discontinue hedge accounting.

Strict criteria must be met at inception and throughout the term of the hedge relationship in order for hedge accounting to be applied.

the gold price fixed twice a day to balance supply and demand in the London bullion market

the gold price fixed at the end of the day in the London bullion market

the gold price fixed at 11:00 am. local time in the London bullion market from a panel of gold traders

the gold price fixed at 11:00 a.m. to settle gold contracts in the London bullion market

Treasury bill

Repo against Treasury bill collateral

They have the same yield

Cannot say

The parking of deals or positions with any counterparty is discouraged B. The parking of deals or positions with any counterparty should be forbidden

The parking of deals or positions should be subject to a clear policy laid down in writing by senior management

In jurisdictions where position parking is allowed, prior approval should be sought from the regulator

When one of the principals confirms the deal

When the principals give a written undertaking for all deals done at the end of the day

When acknowledgement is received from the principals that the deal is done

When both back offices acknowledge the deal

one day after the deal is done

within two hours of the trade being booked and as soon as technologically possible

immediately after having received the confirmation of the counterparty

no later than the value date of the first leg of the transaction

the expected loss on the portfolio in the worst 95% of cases

the expected loss in those cases where the loss exceeds the VaR at the 95% level

the maximum loss in those cases where the loss exceeds the VaR at the 95% level

the expected loss in those cases where the loss exceeds the VaR at the 5% level

The buyer to each seller and the seller to each buyer

A clearing agent only

The self-regulatory organization for the futures exchange

The owner of the futures exchange

capital adequacy regulations in Pillar 1

market risk and Tier 3 capital elements

internal management procedures subject to supervisory review in Pillar 2

market discipline, disclosure and transparency in Pillar 3

Currency Conversion Factor

Credit Conversion Factor

Credit Contribution Factor

Credit Collateralization Factor

You are, as it is your responsibility to check periodically that the price has not been dealt upon.

The broker is, as he must immediately tell you that your price has been dealt upon.

The other bank is, since it did not immediately seek confirmation.

All the parties, particularly you and the other bank.

1.32%

1.29%

1.28%

0.65%

Sell 3x6

Buy 3x6

Sell 4x7

Buy 4x7

agree, since entertainment is a normal part of business

refer this to senior management

agree but insist on paying half the cost

agree, if the broker pays for the event but does not attend it

1 minus recovery rate, probability of default and exposure at default

exposure at origination, exposure at default and loss given default

loss given default, 1 minus recovery rate and exposure at default

exposure at origination, recovery rates and probability of default

XAU

XAG

XPT

XPD

To cover losses incurred between variation margin payments

To exclude retail investors

To pay reserve requirements

To cover fees due to the clearing house

SONIA

STINA

STONIA

EONIA

Less than 50% probability

50% probability

More than 50% probability

Zero probability

should be assumed to have zero duration

should be treated like other instantly variable rate liabilities, such as overnight money market borrowing.

should be assumed to have a low correlation with money market reference rates

represent a minor contributor to interest rate risk and can safely be disregarded

You pay JPY 440,694

You receive JPY 440,694

You pay JPY 438,882

You receive JPY 438,882

liquidity risk

business risk

operational risk

funding risk

usually the current spot EUR/USD mid-market rate

commonly the prevailing 4-month forward EUR/USD mid-rate

always the forward EUR/USD bid rate of the first swap leg

generally the prevailing 2-month forward EUR/USD mid-rate

pay 250, receive 1,250, receive 1,750, receive 2,000

receive 250, pay 1,250, pay 1,750, pay 2,000

pay 2,500, receive 12,500, receive 17,500, receive 20,000

receive 2,500, pay 12,500, pay 17,500, pay 20,000

a five-year liability and a three-month asset

a five-year asset and a three-month liability

a five-year asset only

a three-month liability only

overnight, tom-next and spot-next

maturities up to one week

maturity dates of less than one month

maturity dates of less than 10 days

Survive a liquidity crisis

Absorb credit losses

Absorb any type of unexpected loss

Absorb any type of expected loss

innovative hybrid capital instruments with incentives to redeem

common shares issued by bank

retained earnings

stock surplus (share premium)

0.9849

1.0154

1.9759

0.5061

Dealers may seek a compensation payment in favor of the bank or an adjustment to brokerage bills from the broker for switching names.

If requested by a broker to clear a transaction through name switching, a dealer must ensure that such activities have the prior approval of senior management.

The practice of name switching/substitution is neither acceptable nor desirable.

Name switching/substitution transactions should be executed as promptly as possible not considering credit limits and policy guidelines.

The number of EUP per USD

The number of USD per EUR

Depends on whether the price is being quoted in Europe or the US

Depends on whether the price is being quoted interbank or to a customer

That the Master FX Give-Up Agreement (FMLG - New York FED FXC) published by the Foreign Exchange Committee can be used for this purpose.

That this agreement need not specify the permitted transaction types, tenors or credit limits.

That this agreement must include instructions that the prime broker must advise the executing dealer promptly of trades for give-up.

That this agreement should not involve any requirement for the executing dealer to inform the prime broker of the material terms of the transaction once a trade has been executed.

Bid/offer spread

Flow information

Relationships

All of the above

the tenth of the following months: March, June, September and December

the third Wednesday of January, April, July and October

the Monday before the third Wednesday of March, June, September and December

the third Wednesday of March, June, September and December

a swap

a cap

a swaption

a collar

they have good track records in dealing both for their institution and for themselves

there have been no previous conflicts of interest in the dealing room

there is a clearly defined and written policy about the matter

the dealers see no conflict of interest in such dealing

entering into a pay fixed I receive variable standard interest rate swap

entering into a receive fixed I pay variable amortizing interest rate swap

entering into a EUR/USD FX swap

entering into a receive fixed I pay variable standard interest rate swap

Subject to local legal requirements, this matter is one for bank management to decide.

Bank management should encourage such activities because it allows banks to monitor the gambling habits of their staff.

Where this is allowed, bank management should have a clearly defined policy and written procedures.

Bank management should allow staff to deal for their personal account on a case to case basis.

It is put at the disposal of the buyer

It is held by the seller in the name of the buyer

It is held by the tn-party agent in the name of the buyer

It is frozen in the sellers account with the tri-panty agent

At maturity

Annually

Semi-annually

Quarterly

mis-stroke

slip-bid

mis-hit

broken trade

USD

AUD

Depends on whether the price is being quoted in Australia or the US

Depends on whether the price is being quoted interbank or to a customer

Sell a 1x3 FRA at 0.42%

Buy a 1x3 FRA at 0.45%

Buy a 1x4 FRA at 0.58%

Sell a 1x4 FRA at 0.54%

The risk of failure of a payments or settlement system

The risk that only one side of an exchange of currencies will be made

The risk of payments ‘gridlock’ in a real-time gross settlement system

The risk that default by a counterparty before the value date means you have to replace the defaulted deal at a worse rate

The sensitivity of the option value to changes in interest rates

The sensitivity of the option value to changes in volatility

The sensitivity of the option value to changes in the time to expiry

The sensitivity of the option value to changes in the price of the underlying

350%

750%

1250%

1500%

14th December

15th December

16th December

17th December

Financial institutions have to establish procedures for handling limit breaches that are in accordance with their decision-making hierarchy.

If a partial limit violation does not exceed the overall limit, no reaction is required.

The definition of escalation levels is not required in order to react appropriately to different sorts and intensities of limit breaches.

It is adequate and proper to define reactions only to standard cases of limit violations.

Substantial opportunity for gain and limited risk of loss

Substantial risk of loss and substantial opportunity for gain

Limited risk of loss and limited opportunity for gain

Substantial risk of loss and limited opportunity for gain

Bank dealers should, wherever possible, give brokers prior indication of counterparties with whom they would be unwilling to do business.

Brokers may divulge the names of principals prematurely to induce a counterparty to transact.

Dealers should never give brokers guidance on the extent of their price differentiation across broad categories of counterparties.

When a principal’s name proves unacceptable to another principal, the broker is bound to divulge who refused it.

Pay fixed and receive floating through swaps for the term of the portfolio

Pay floating and receive fixed through swaps for the term of the portfolio

You cannot: the maturity of the swaps would be longer than that of the deposits

You should not: there would be too much basis risk

Kosovo

Andorra

Albania

Montenegro

the Asset Liability Management Committee (ALCO)

the Financial Resources and Compensation Committee

the Credit Committee

the Federal Open Market Committee

9.5836

6.2834

0.1591

0.1043

When trading in financial products described by the Model Code, dealers and voice brokers need not clarify whether they propose to use standard terms.

Standard terms and conditions should be signed bilaterally by senior management of both principals before any applicable market transactions are entered into.

When using legal agreements any proposed modifications or choices offered in the agreement must be clearly stated as soon as the trade is agreed.

For many instruments, standard master agreements issued by recognized authorities need not be signed by senior management of the principals intending to transact business.

Product Control, Legal and Compliance, Front Office, Treasury and Operations

Senior management only

Front Office and Treasury Middle Office

All relevant areas

GBP 2,507,161.46

GBP 2,507,063.36

GBP 2,507,006.85

GBP 2,507,106.16

Information that could be damaging to a third party

Unsubstantiated rumours

Unsubstantiated information that they suspect may be inaccurate and damaging to a third party

Price-sensitive information

if you do so when you make the price

provided the amounts are marketable

once you have discovered the name of the counterparty for credit reasons

at anytime

currency risk

operational risk

liquidity risk

settlement risk

if he is confident that the dealer will not back out of the deal

if both parties to the deal have established credit lines for each other

if one party to the deal acknowledges interest

if he receives acknowledgement from both the dealers involved

Gambling and betting amongst market participants should be strongly discouraged.

Gambling and betting amongst market participants may be permitted if management monitors it.

Gambling and betting amongst market participants should be prohibited.

Gambling and betting amongst market participants is only tolerated if it is previously reported to the CFP of the ACI.

to run a zero gap

to hold more interest rate sensitive assets than interest rate sensitive liabilities

to reduce the size of the balance sheet

to hold fewer interest rate sensitive assets than interest rate sensitive liabilities

under reference

firm, but not necessarily in marketable amounts

firm, unless otherwise qualified

merely indicative

allot the amount for which the price is valid pro rata amongst some principals in accordance with the amount proposed by each and inform the other dealers that “nothing was done”

decide which principals he will allot the amount for which the price is valid and inform the other dealers that “nothing was done”

evenly allocate the amount for which the price is valid amongst all the principals and inform all the relevant dealers

apportion the amount for which the price is valid pro rata amongst all the principals concerned in accordance with the amount proposed by each and inform all the relevant dealers

AnFRA

An option on an FRA

A collar

AnIRS

The market value of bond collateral at the start of the repo at the clean price of the bond

The market value of bond collateral at the start of the repo at the dirty price of the bond

The amount of cash actually paid for collateral at the start of the repo

The amount of cash actually paid for collateral at the start of the repo plus repo interest

Longer rates are lower than short rates

Forward exchange rates are at a discount

Short term rates are lower than long

Forward exchange rates are a premium

e-mail

fax or letter

MTn99 SWIFT message

MT670/671 SWIFT message

Wherever the parties agree

In London

In NewYork

In Frankfurt